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Economy

Malaysia to boost spending, rein in deficit in 2017 budget

KUALA LUMPUR -- The Malaysian government said Friday it will keep the fiscal deficit in check but continue to spend to boost the nation's flagging economy. It also intends to seize opportunities arising from China's "new normal" through trade and investment, and urge low income earners to take up ride-sharing-related jobs to generate extra income.

In revealing the government's 2017 budget for the fiscal year starting Jan. 1, Prime Minister Najib Razak said Malaysia is "on the right track" to achieve economic growth despite global uncertainties.

The third-largest economy in Southeast Asia has allocated 260.8 billion ringgit ($62 billion) to spend in the next year, 3.4% more than in 2016. The bulk of the expenditure, 82.4%, will go to sustaining government operations that include civil service and subsidies. The rest will go to spending on infrastructure development, education, housing and security.

In addition to the ongoing subway projects to link the capital Kuala Lumpur to the suburbs, Najib said a new 600km rail line costing 55 billion ringgit will be built in phases on the east coast.

Malaysia's economy is projected to grow between 4% and 5% next year, driven largely by domestic demand. The target is slightly better than the 4% to 4.5% projected this year.

The slump in commodity prices in recent years has hit the government's coffers, which at one point relied for over a third on oil and gas revenue. Annual export growth is expected to slow to 1.1% in 2016 compared to 1.6% last year as economic growth in China, Malaysia's largest trading partner, continues to slacken.

Malaysia said a 10% drop in exports to China will result in 0.02% drop in real gross domestic product.

"Next week I will be heading to China, and we hope to attract more investment," Najib said in a speech in parliament.

Foreign direct investment from China jumped 70% year on year to 8.3 billion ringgit in the first six months of 2016, largely in the finance and construction sectors.

As China shifts to a "new normal" by focusing on domestic consumption as a growth driver, Malaysia said it will tap opportunities in trade by working together with Chinese state-owned enterprises. It also offers China a platform to raise funds via Islamic bonds in Malaysia.

Fiscal discipline

Najib has pledged to continue with reducing budget deficit from the estimated 3.1% this year to 3% in 2017. There will be no increase in the 6% goods and services tax, but the government will further reduce subsidies and social assistance by 9%.

With such fiscal discipline, the outlook is expected to gradually improve over the medium term, helped by rising oil and gas prices, said Rajiv Biswas, an economist at IHS Global Insight.

Still, the government wants to lift the livelihoods of the "B40" lower income group -- 40% of households -- with monthly incomes of less than 3,900 ringgit. On top of receiving yearly cash handouts, individuals in the group could apply for a rebate of 4,000 ringgit to buy a Proton car to use as a driver for ride-sharing services such as Uber, according to Najib.

But analysts worry that such state assistance could perpetuate the group's reliance on aid.

"The continuation of such subsidies resulted in long term problems of affordability and sustainability," said Wan Saiful Wan Jan of the IDEAS think tank.

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